UNITED STATES OF AMERICA, PETITIONER V. AMERICAN COLLEGE OF
PHYSICIANS
No. 84-1737
In the Supreme Court of the United States
October Term, 1985
On Writ of Certiorari to the United States Court of Appeals For the
Federal Circuit
Reply Brief For the United States
In our opening brief, we contend that this case is governed by
Treas. Reg. Section 1.513-1(d)(4)(iv) (Example 7), which Congress
explicitly endorsed in 1969. That Example concerns a tax-exempt
professional association which, like respondent, has among its goals
the "continuing education of its members in matters pertaining to
their profession" (ibid.). The Example addresses the publication by
such an association in its professional journal of advertising which,
like respondent's advertising, "promotes only products which are
within the general area of professional interest of its members"
(ibid.). The Example concludes that the association's "publication of
advertising designed and selected in the manner of ordinary commercial
advertising is not an educational activity of the kind contemplated by
the exemption statute" (ibid.). Such commercial publicity, the
Example observes, "differs fundamentally from (an educational)
activity both in its governing objective and in its method," since
"the form, content, and manner of presentation of the advertising
messages are governed by the basic objective of the advertisers to
promote the sale of the advertised products" (ibid.). The Example
accordingly concludes that the publication of commercial advertising
does not "contribute importantly" to the accomplishment of the
association's educational purposes and that its advertising revenues
are subject to tax (ibid.).
In contending that its publication of commercial advertising does
contribute importantly to the accomplishment of its education
purposes, and that its advertising revenues should be immune from tax,
respondent seeks to avoid Example 7 in three ways. First, it contends
that its advertisements are "uniquely informative" (Br. 35) and
"materially different" (id. at 42) from the advertisements in Example
7. Second, it contends (id. at 35-42) that Example 7 does not apply
to it. Third, it contends (id. at 44-46) that the Regulation is
invalid. We anticipated each of these contentions in our opening
brief and have shown each to be wrong. Several of respondent's
assertions, however, warrant a brief reply.
1. In asserting that its advertisements are "materially different"
(Br. 42) from those described in Example 7, respondent relies
principally on what it calls "the pervasive regulation of the content
and format of prescription drug ads" by the Food and Drug
Administration (Br. 3, 43 n.51, 43-44 n.53). As a result of FDA rules
"specifying the required and prohibited editorial content of
prescription drug ads," respondent says, the "content and design of
(such) ads is largely mandated by the government" (id. at 3, 44 n.53).
Compliance with FDA regulations assertedly makes respondent's ads
"uniquely informative" (id. at 35), so that "in substantial part
(they) serve not the private commercial purposes of the advertiser,
but rather a public purpose" (id. at 43 n.51). Respondent thus
concludes that its advertising, unlike that in Example 7, is not
"designed and selected in the manner of ordinary commercial
advertising" (Treas. Reg. Section 1.513-1(d)(4)(iv) (Example 7)).
The FDA's rules governing prescription drug advertising have their
genesis in the Federal Food, Drug, and Cosmetic Act, ch. 675, 52 Stat.
1040 et seq. As amended by the Drug Amendments of 1962, Pub. L. No.
87-781, Section 131, 76 Stat. 791-792, the Act requires inter alia
that manufacturers include in their advertisements for prescription
drugs a "brief summary" describing the product's "side effects,
contraindications, and effectiveness" (21 U.S.C. 331, 352(n)). Under
FDA regulations, this summary must be "true" and must "present a fair
balance" concerning "the selected purpose(s) for which the drug is
recommended or suggested in the advertisement" (21 C.F.R.
202.1(e)(3)(ii)). So-called "reminder advertisements," which merely
"call attention to the name of the drug product" without including
indications or dosage recommendations for its use, are exempt from
these rules (21 C.F.R. 202.1(e)(2)(i)).
There is no merit whatsoever to respondent's assertion that, in
consequence of these FDA regulations, the "content," "design," and
"format" of its drug advertisements are "largely mandated by the
government" (Br. 3, 43 n.51, 43-44 n.53). While the FDA sets forth
general guidelines designed to prevent drug ads from being false or
misleading, the basic decisions about what will be said in each ad,
and how it will be said, remain the province of the advertisers, who
enlist the considerable literary and promotional skills of Madison
Avenue in an effort to sell their wares. The FDA does not require
that respondent's ads depict happy faces beaming down on bottles of
Robitussin (Pet. App. 56a), project full-page illustrations of the
Great Wall of China to promote angina medication (id. at 66a), or show
shapely calves, well-stockinged in support hose, in close proximity to
footballs (id. at 62a). The FDA rules in some instances may require
that respondent's ads, like those described in Example 7, provide
certain information in order 'to comply with * * * general standards
of taste, fairness, and accuracy" (Treas. Reg. Section
1.513-1(d)(4)(iv) (Example 7)). "(B)ut within those limits the form,
content, and manner of presentation of (respondent's) advertising
messages," as of the advertising messages described in Example 7, "are
governed by the basic objective of the advertisers to promote the sale
of the advertised products" (ibid.). Cigarette advertisements, like
prescription drug advertisements, are subject to "pervasive
regulation" (Resp. Br. 43 n.53) by the government. See 15 U.S.C. 1331
et seq. But it could scarcely be contended that scenes of cowboys
riding into the sunset are "uniquely informative" (Resp. Br. 35) or
"materially different" from other commercial advertising messages (id.
at 42) by virtue of including the Surgeon General's warning. See 15
U.S.C. 1333.
In seizing upon the FDA regulations to differentiate drug ads from
the common run of taxable commercial advertising, respondent and amici
reiterate in this Court arguments that they unsuccessfully made to
Congress in 1969. See, e.g., Tax Reform, 1969: Hearings Before the
House Comm. on Ways and Means, 91st Cong., 1st Sess. 1114, 1119, 1200,
1260-1261, 1391. The American Medical Association, amicus here,
emphasized before Congress what "(t)he food and drug law requires" of
prescription drug ads in an effort to demonstrate that "(n)o other
advertising provides as much complete and objective information" (id.
at 1261). The American Psychiatric Association told Congress that it
should "be thankful that we have such informative drug advertisements,
regulated as they are by the Food and Drug Administration" (id. at
1119). And respondent itself testified that the ads in its journal
provide a "thumbnail sketch of what (a prescription) drug does, what
its contraindications are, what its precautions are, what its warnings
are," all "according to Food and Drug Regulations" (id. at 1114).
Unpersuaded by their testimony, Congress expressly approved the
challenged regulations, noting that they "mainly affected the
advertising income of publications such as medical journals," the bulk
of whose advertisements, then as now, promoted prescription drugs.
H.R. Rep. 91-413, 91st Cong., 1st Sess. Pt. 1, at 44 (1969).
Respondent's effort to differentiate its ads from those in Example
7 is thus unavailing. The FDA regulations obviously do not
distinguish respondent's drug ads from those appearing in taxpaying
medical journals -- many of whose ads "were identical" to respondent's
(Pet. App. 28a) -- since those regulations, applicable as they are to
all prescription drugs in interstate commerce (21 U.S.C. 331), cover
drug advertising nationwide. And the FDA regulations do not
distinguish respondent's ads from those described in Example 7, since
those ads likewise couple a predominately commercial message with
certain information designed to ensure compliance with "general
standards of taste, fairness, and accuracy." The Claims Court's
findings of fact, encapsulated in its determination that respondent's
advertising "was typical commercial publicity" (Pet. App. 28a), show
that respondent's ads, like those in Example 7, were "designed and
selected in the manner of ordinary commercial advertising." See U.S.
Br. 30-31. Example 7 accordingly dictates that respondent's
advertising profits are subject to tax. /1/
2. Respondent alternatively contends (Br. 18-20, 35-42) that, if
its advertising should be deemed to resemble that in Example 7, the
principles of Example 7 should not apply to it, tax-exempt as it is
under Section 501(c)(3), but rather should apply only to advertising
published by professional associations that are tax-exempt as
"business leagues" under Section 501(c)(6). But as we showed in our
opening brief (at 34-40), the subsection of Section 501(c) under which
a tax-exempt publisher happens to be organized makes no difference in
determining the educational character of the advertising that it
publishes. Example 7 concludes that ordinary commercial advertising
like respondent's is not "educational" in the sense intended by the
tax-exemption statute because its "informational function is
incidental to the controlling aim of stimulating demand for the
advertised products" (Treas. Reg. Section 1.513-1(d)(4)(iv) (Example
7)). Obviously, that conclusion logically applies regardless of the
source of the publisher's tax exemption: it is the educational
character vel non of the advertising that determines the application
of the unrelated business income tax.
We further explained in our opening brief (at 35, 38-39) that
Example 7 could not sensibly be read as respondent would read it,
since professional associations like respondent generally have the
option of qualifying for tax exemption either under Section 501(c)(3)
or under Section 501(c)(6). Respondent professes to find this "(o)ne
of the more surprising aspects" of our brief, contending that "(t)he
(c)(3) category of exemption is distinguishable from (c)(6) in several
* * * significant respects" (Br. 37, 39). We of course agree that
there may be significant differences at the margins between some
Section 501(c)(3) groups (such as churches) and some Section 501(c)(6)
groups (such as professional football leagues). Our point was rather
that any such differences are generally slight in the case of
professional associations like respondent -- organizations that draw
their membership exclusively from a single profession and that have
broad educational or charitable goals (U.S. Br. 35, 38).
Respondent studiously avoids controverting the point that we
actually made (see Resp. Br. 42), and the briefs filed by amici curiae
herein demonstrate that our point is correct. Amicus Massachusetts
Medical Society recites that it is "the oldest American medical
association in continuous existence," that its principal purposes
include the promotion of health care and the "conduct of educational
programs," and that it publishes "journals and periodicals * * *
devoted primarily to the science and practice of medicine." Brief for
the American Medical Association and the Massachusetts Medical Society
as Amici Curiae at 2. Amicus American Medical Association recites
that it "was founded in 1846 to promote the science and art of
medicine and the betterment of public health" and that it "publishes
scholarly medical journals in furtherance of its exempt purposes" (id.
at 1-2). These two associations recite exempt purposes virtually
identical to respondent's (see Resp. Br. 2), yet both are tax-exempt
under Section 501(c)(6) rather than under Section 501(c)(3).
There is thus no merit to respondent's assertion that the reference
in Examples 6 and 7 to "an association exempt under Section 501(c)(6)"
reflects a deliberate decision on the Treasury's part (Resp. Br. 36)
to confine those Examples' analysis to publishers that rely on Section
501(c)(6) as the source of their exemption. The principles of
Examples 6 and 7 have been universally understood -- by Congress, the
courts, the Internal Revenue Service, scholarly commentators, and
witnesses (including respondent itself) who testified concerning the
Regulation before Congress in 1969 -- to apply to tax-exempt
publishers across the board. See U.S. Br. 36-38; Rev. Rul. 72-431,
1972-2 C.B. 281 (applying principles of Example 7 to Section 501(c)(3)
group); National Muffler Dealers Ass'n v. United States, 440 U.S.
472, 484 n.19 (1979) ("While the plausibility and consistency of the
Commissioner's interpretation are relevant to the reasonableness of
the regulation as applied * * *, the Commissioner is otherwise free to
determine how the regulation he has written should be construed.").
Examples 6 and 7, like the thousands of other examples incorporated in
the Treasury Regulations, are meant to be concrete illustrations of
general rules. If they were not particularized, they would not be
"examples." To deprive their analysis of any extrapolative force, as
respondent would do, is to ignore their function. /2/
3. Respondent finally asserts that Example 7, if construed to reach
its advertising, "lacks a rational basis" and "must be overturned (as)
in conflict with the statute or otherwise in excess of legislative
authority" (Br. 45-46). Respondent understandably proffers this
contention hesitantly, since, as we showed in our opening brief (at
18-26), Congress explicitly endorsed the Regulation in 1969. But
respondent professes to find that legislative history "contradictory,"
"scattered," "sketchy and generalized," and as hard to "divine" as
"tea leaves" (Br. 21, 25, 27, 33). Noting that the Tax Reform Act of
1969 did not change the statutory definition of "unrelated trade or
business" (I.R.C. Section 513(a)), respondent argues that "the 1969
legislative history * * * is of little value" in resolving the
question presented here (Br. 11). And even if Congress in 1969 should
be thought to have endorsed the Regulation "in general," respondent
says, Congress surely cannot be held to have approved the Regulation's
every jot and tittle, least of all something as lowly as a mere
"Example" (Resp. Br. 26 n.31, 29, 34). Respondent notes that the
House bill was 368 pages long, and suggests that Examples 6 and 7 may
have crept by while Congress, distracted by weightier matters, was
looking in the other direction (Resp. Br. 21).
These contentions are wholly insubstantial. To begin with, it is
well established that interpretive regulations of the Treasury, "if
found to 'implement the congressional mandate in some reasonable
manner,' must be upheld." National Muffler Dealers Ass'n v. United
States, 440 U.S. at 476 (quoting United States v. Cartwright, 411 U.S.
546, 550 (1973)). The conclusion reached by Example 7 -- that
commercial advertising "differs fundamentally from (an educational)
activity both in its governing objective and in its method" -- is a
logical construction of the term "educational" as used in Section
501(c)(3). As noted in our opening brief (at 43), to the extent a
publisher uses commercial advertising as an information-conveying
vehicle, charging the advertiser a fee as a condition to publishing
the ad, the message is one of the advertiser rather than one to which
the publisher would choose to devote its own, general resources. From
the publisher's perspective, therefore, any "informational function"
of such advertising is, as the Claims Court found, "incidental to its
purpose of raising revenue" (Pet. App. 30a). From the advertiser's
perspective, similarly, the ads' informational content is just one
means of furthering "the controlling aim of stimulating demand for the
advertised products" (Treas. Reg. Section 1.513-1(d)(4)(iv) (Example
7)). Respondent's publication of commercial advertisements, like
other commercially-oriented ventures, may, as this Court has observed,
"serve incidentally to educate certain persons. But (it is) directed
fundamentally to ends other than that of education." Better Business
Bureau v. United States, 326 U.S. 279, 284 (1945). In reaching the
same conclusion in Example 7, the Treasury acted well within the scope
of its interpretive authority.
Contrary to respondent's contention, moreover, Example 7 has
received the explicit endorsement of Congress, and it thus carries
with it a particularly strong, if not an irrebuttable, presumption of
correctness. After the Regulation was promulgated, Congress held
extensive hearings specifically to consider "whether advertising
income should be characterized as unrelated in the case of magazines
and other periodicals published by exempt organizations where the
editorial matter of the publication is related to its exempt
function." Tax Reform, 1969: Hearings Before the House Comm. on Ways
and Means, 91st Cong., 1st Sess. 6 (1969). After listening for
several days to arguments substantially similar to those respondent
and amici voice here, Congress enacted Section 513(c) of the Code,
entitled "Advertising, Etc., Activities." In the course of doing so,
Congress expressly endorsed the challenged Regulation, noting that it
"mainly affected the advertising income of publications such as
medical journals" (H.R. Rep. 91-413, 91st Cong., 1st Sess. Pt. 1, at
44 (1969)). The House stated that, under the statutory standard it
was then adopting, "advertising in a journal published by an exempt
organization is not related to the organization's exempt functions,
and therefore * * * this income should be taxed" (id. at 50). The
Senate agreed that the Regulations, "insofar as they apply to
advertising and related activities, should be placed in the tax laws"
(S. Rep. 91-552, 91st Cong., 1st Sess. 75 (1969)). And Examples 6 and
7, contrary to respondent's assertion, were not at the periphery of
what Congress endorsed, but were at its core, for it was those
Examples that discussed the tax treatment of professional journal
advertising, upon which the bulk of the controversy centered.
This Court has repeatedly held that "'the construction of a statute
by those charged with its execution should be followed unless there
are compelling indications that it is wrong, especially when Congress
has refused to alter the administrative construction.'" CBS, Inc. v.
FCC, 453 U.S. 367, 382 (1981) (quoting Red Lion Broadcasting Co. v.
FCC, 395 U.S. 367, 381 (1969)). Accord, e.g., Haig v. Agee, 453 U.S.
280, 291 (1981). Here, moreover, by amending Section 513(c) in 1969
to pave the way for the Regulation's enforcement, "Congress has not
just kept its silence by refusing to overturn the administrative
construction but has ratified it with positive legislation." Red Lion
Broadcasting Co., 395 U.S. at 381-382. There is accordingly no basis
for respondent's challenge to the validity of the Regulation.
CONCLUSION
For these reasons and for the reasons set forth in our opening
brief, the judgment of the court of appeals should be reversed.
Respectfully submitted,
CHARLES FRIED
Solicitor General
JANUARY 1986
/1/ Amicus curiae American Society of Association Executives (Br.
19-26) supports respondent's contention that its commercial
advertising, notwithstanding Example 7, should be deemed
"substantially related" to its educational purposes. The counsel of
record for that association, however, took a rather different view of
the Regulation ;in 1969. "(I)t is arguable," he wrote following the
enactment of Section 513(c), "that there can still be 'related'
advertising. However, the legislative history and intent of the
Congress is so clear that the likelihood of this argument prevailing
as to any period after December 31, 1969 is very improbable." Webster,
Unrelated Business Income, 23 Tax Law. 471, 476 (1969).
/2/ As respondent itself observes (Br. 36 & App. A), the
regulations promulgated under the Code's unrelated business income tax
provisions include more than 80 examples, and these examples refer to
their various tax-exempt subjects in various ways. They sometimes
refer generically to "an exempt organization" (Treas. Reg. Section
1.512(B)-1(C)(2)(IV) (Example)); they sometimes refer to an
organization by its category, e.g., a "scientific organization"
(Treas. Reg. Section 1.513-1(d)(4)(iv) (Example 1)); they sometimes
refer to an organization by the subsection under which it is exempt,
e.g., "an organization described in section 501(c)(3)" (Treas. Reg.
Section 1.513-1(d)(4)(i) (Example 1)); and they sometimes refer to an
organization by a combination of the latter two methods, e.g., "an
exempt scientific organization described in Section 501(c)(3)" (Treas.
Reg. Section 1.512(b)-1(l)(2)(ii) (Example 1)). Examples using
business leagues as their subjects reveal the same heterogeneous
pattern, referring sometimes to "an exempt business league" (Treas.
Reg. Section 1.512(a)-1(e) (Example)), sometimes to "an exempt trade
association (Treas. Reg. Section 1.512(a)-1(f)(2)(iii) (Example 1)),
sometimes to "an association exempt under section 501(c)(6)" (Treas.
Reg. Section 1.513-3(e) (Example 1)), and sometimes to "an exempt
trade association described in section 501(c)(6)" (Treas. Reg. Section
1.514(b)-1(c)(2)(ii) (Example 1)). The randomness of this pattern
confirms the common sense observation that the Regulations in their
various examples use various types of exempt organizations for
illustrative purposes only, and that no weight should be attached to
the particular subject used or to the particular formula used to
describe it.